More than tighter or looser, what EU needs are capital requirements that distort less the allocation of bank credit

Sir, I refer to Jim Brunsden’s “EU set to resist tighter capital requirements” September 30.

EU (and all other) needs to decide what’s more important for it, the short term stability of its banking sector, or the future perspectives of its real economy. If it is the first then increasing the capital requirements must be a priority.

But, if the real economy is more important, then instead of being more accommodating with the capital requirements, as is now being discussed, it needs much more to rid itself of those risk weighted requirements that so distort the allocation of bank credit.

That would not not necessarily entail having to increase too much bank capital. Some increases for holding what’s “safe” could be compensated by some decrease of capital required for holding what’s “risky”, like loans to unrated SMEs. The latter would not affect the stability of the banks since there is never excessive dangerous bank exposures built up with what is ex ante perceived as risky.

How to proceed? I do not have data to recommend something exact but, one way of doing it, could be that of assigning a risk-weight of 60% for all assets… and then increase it by 5% in order to reach 100% for all assets in eight years.

Another, much more cumbersome of course is to define individual capital requirements for each bank, starting with were each one of these currently find themselves.

And of course a Chilean type recapitalization plan that entails central banks taking much of the not performing loans off bank’s balance sheets, subject to conditions such a not paying dividends, and at one time having to repurchase those loans, would give a big needed boost to the whole credit market.

@PerKurowski ©

How much should we claw-back from inept bank regulators who neglected their fiduciary responsibilities?G

Sir, Gillian Tett writes: “If bankers are going to defend their craft, let alone their high pay, they have to start truly sharing risks with shareholders and taxpayers…If clawbacks had been in place a decade ago, those scandals at Deutsche and Wells might never have erupted in the first place.” “Clawbacks emerge as a vital weapon in finance” September 30.

That applies to regulators too.

The Basel Committee neglected to define the purpose of the banks before regulating these and so came up with the risk weighted capital requirements for banks that have so distorted the allocation of bank credit to the real economy.

The Basel Committee also neglected to do the empirical studies to determine what cause bank crises and so placed much higher risk weights on what was perceived as safe, when actually all crises have resulted from unexpected events like natural disasters, illegal behavior like lending to affiliates, or excessive exposures to what was erroneously perceived as very safe.

The results? A banking crisis because of excessive exposures against too little capital to what was perceived, decreed or concocted as safe; and economic stagnation resulting from too little financing to the “risky” SMEs and entrepreneurs.

Is that not an amazing fiduciary negligence that merits, as a minimum minimorum. some claw-backs?

PS. And all those journalists and famed columnists that so blithely ignored the regulatory faults when denounced over and over again, should they go scot-free?

@PerKurowski ©

Millions of small loans not given to “risky” SMEs, only because of bank regulations, endangers our social stability

Sir, Mohamed El-Erian writes: “for things to continue as they are, you need to be confident that the economic, financial, political and social tensions spawned by low growth will not become the defining drivers of the economy. And that is increasingly unlikely in light of what is transpiring on the ground every day… If the political response continues to disappoint, low growth will give way to a recession while artificial stability in the financial system is replaced by disorder.” “Yet more low but stable global growth is unsustainable” September 30.

Absolutely! As I have been arguing in more than two thousand letters to FT over the years, we have been doomed to dangerous doom and gloom by bank regulators, as they have impeded the economy to breath that risk-taking oxygen that allows it to move forward, so as not to stall and fall.

Just think about the millions of small credits to “risky” SMEs and entrepreneurs around the world, that have not been awarded the last decade only because of Basel Committee’s stupid, dumb, senseless, useless, risk weighted capital requirements for banks.

To bridge that cliff of joblessness and hardships that it has and will have caused, I can’t think of anything else than a Universal Basic Income, a Citizen's Dividend, or whatever you want to call it. Of course that has to be duly funded, in much by reducing the margins of the redistribution profiteers, no funny money will do.

@PerKurowski ©

How could regulators, and FT, believe that banks, if given the chance, would not to try to minimize capital?

Sir you write: “At present, large banks are allowed to use their own internal models to calculate risk-weighted assets — a crucial measure for determining the amount of capital they are required to hold. Yet over time, banks’ RWA as a proportion of total assets have been drifting down. There is a strong suspicion that this is not just due to making safer loans.” “Europe must address its banks’ enduring malaise” September 30

Of course not! What suspicion? How could regulators, and FT, believe that banks would not try to maximize their risk adjusted returns on equity by minimizing the equity they were required to hold? The big banks, with their own Supercalifragilisticexpialidocious risk models; the smaller banks, by abandoning lending to those with Basel’s standard approach requiring them to hold more capital, like SMEs and entrepreneurs.

There are two ways for a bank to maximize its return on equity. One is minimizing the equity they need to hold, the other is lending or investing in assets deemed risky, at interest rates that are higher than would be normal, to make up for the fact there is more capital involved, but thereby also making the risky riskier. Sir, if you were on a bank Board which one would you prefer?

Sir, the Basel Committee’s, the Financial Stability Board’s and your own naiveté, is just startling.

@PerKurowski ©

For regulators to impose risk weights is antithetical to the American principle of treating all citizens equally.

Sir, Judy Shelton writes: “The Fed has adopted monetary policy decisions that channel low-cost funding to wealthy investors and corporate borrowers at the expense of people with ordinary bank savings accounts and retirees on fixed-income pensions. That is not only inherently political — it is antithetical to the American principle of treating all citizens equally.” “Trump is right to take aim at the ‘political’ Fed”. September 29.

That might be political or not, but let us not forget that the current financial mess derives from something not really political but simply dumb; the senseless distortion of the allocation of credit to the real economy caused by regulators imposing risk weighted capital requirements for banks. That began in 1988 with Basel I and really took off in 2004 with Basel II, and Basel III is in many ways worsening it.

Just looking at the risk weights of: 0% for the sovereign, 20% for the AAArisktocracy, 35% for residential houses, 100% for We the (unrated) People and 150% for the below BB-rated outcasts; and considering that credit risk is already cleared for by banks with interest rates and the size of exposure, should say it all. And if that’s not antithetical to the American principle of treating all citizens equally what is.

But since Judy Shelton is a member of the Trump economic advisory council, and Donald Trump has often been involved with casinos, let me explain it all in terms of betting. The underlying principle of any casino is that all bets have the same expected financial outcome, a small loss, which represents the profit of the house. But what would happen if regulators manipulated the whole betting process and declared that the winnings of the house would depend on how risky each bet was, with risk being determined by the odds?

For instance if any safe bet, like on color, or on a pair or an impair number, gave the casino a much higher expected profit than a bet on a “risky” single number, that casino would make huge profits, until those betting there found out, and then it would go out of business.

And that is what regulators are doing when allowing banks to leverage their equity, and the support they receive from society, differently depending on the perceived credit risk. Worse yet, when it comes to the big banks, those who were deemed able to run their own capital risk models, the regulators authorized the casino owners to do their own manipulations.

And that means that The Risky, like SMEs and entrepreneurs, have their access to bank credit much more severely curtailed than usual. And stagnation results.

Worse yet, all that distortion for nothing, because bank crisis never result from excessive exposures to something ex ante perceived as risky, these always result from unexpected events or excessive exposures to something erroneously perceived as very safe.

And to add salt to injury, these failed and risk adverse bank regulations that affect banks in The Home of the Brave, emanate from a Basel Committee and a Financial Stability Board dominated mostly by European bureaucrats.

@PerKurowski ©

Sir, I wonder, is it not time that Mr Martin Wolf looks into the possibilities that little me might have a point?

Sir, in the UK as in most other countries banks have been given the following instructions by their regulators:

If you invest in something safe, like lending to a good sovereign, lending to those with very high credit ratings, or financing residential houses, then you are allowed to hold little capital. That means that you then will be able to leverage your equity and the support society awards you a lot; meaning that you then will be able to earn high expected risk adjusted returns on equity.

But, if you invest in something risky, like lending to SMEs and entrepreneurs, then you need to hold more capital. That means that you then will be able to leverage less your equity and the support society awards you; meaning that you then will probably earn lower expected risk adjusted returns on equity.

Sir, those instructions clearly guarantee that bank credit will not be allocated efficiently to the real economy. Those instructions lead to the dangerous overpopulation of safe havens, and for the economy to equally dangerous under exploration of the riskier but perhaps more productive bays. Those instructions stop banks from financing the riskier future, making them only refinance the safer past. Those instructions will waste, or in some cases even make worse, all what stimulus like QEs, low interest rates, fiscal deficits and other are supposed to help and correct.

On this subject I have written Mr. Martin Wolf literally hundreds of letters over the last decade. Mr. Wolf besides kindly allowing me to publish on his Economists’ Forum in October 2009 an article titled “Free us from imprudent risk aversion”, has completely ignored the subject of the distortions caused by the Basel Committee’s regulations.

In July 2012 Wolf wrote that when "setting bank equity requirements, it is essential to recognise that so-called “risk-weighted” assets can and will be gamed by both banks and regulators. As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk."

That was a reference to part of my arguments that I of course much appreciate but, as can be seen, it had only to do with how useless these regulations are in terms of guaranteeing bank stability.

Now I find that Mr. Martin Wolf quite lugubriously writes: “If the UK is to thrive economically, it will not be enough for it to manage Brexit, hard though that will surely be. Its policymakers must also start from a realistic assessment of the UK’s mediocre performance. This is no world-beating economy. It is not even a Europe-beating economy, except on creating what are too often low-wage jobs. It will have to do far better if it is to deliver the higher living standards its people want in the tougher environment ahead.” “Economic ills of the UK extend well beyond Brexit” September 29.

Sir, I just wonder, is it not time that Mr Martin Wolf looks into the possibilities that little me might have a point… and not only for the UK?

I mean it could be quite timely given the upcoming annual meetings of the IMF and World Bank in Washington and in which Mr. Wolf will again moderate a couple of events, one on inequality and one on jobs, both themes affected by the regulatory distortions.

PS. Unfortunately this year like last, I will not be in Washington so as to be able to participate as civil society and express my concerns there, also for the umpteenth time.

@PerKurowski ©

What if ideas on more productivity were evaluated strictly based on the CVs of those originating these?

Sir, I refer to Sarah O’Connor’s “Want your staff to do more? Just listen to them”, September 28.

Let us suppose you are sitting around a table with all your employees, to hear their suggestions of how to improve productivity. And you also have in front of you their respective CV’s.

And now let us also suppose your boss tells you: “If you find a good idea presented by those having a Master degree or more, I will triple your salary but, if you find that idea among those with less qualifications, you will only get a 10 percent raise.” What will happen?

I ask this because, in terms of bank credits that could lead to more productivity, that is precisely what bank regulators, with their risk weighted capital requirements for banks, are telling the bankers. “If the good idea comes from one AAA rated, you will be allowed to leverage a loan to him much more, meaning you could earn a much higher expected risk-adjusted return on equity, than if that good idea came from an SME or an unrated citizen.

Capisci Sarah?

@PerKurowski ©

Is there no moral issue in Venezuela bondholders being paid as a result of people being denied food or medicines?

Sir, Jonathan Wheatley writes: “In a broad sense, Caracas is already a serial defaulter. It has defaulted on its people by denying them access to the dollars they need for essential imports…” “Only one of Venezuela’s creditors is being paid without fail, on the button, every time: its international bondholders” “Venezuela clutches at straws in desperation to avoid bond default” September 28.

Let me ask: What would be a correct description of he who collects from a debtor knowing that he is being paid by a government because it denies food and medicines to its people? Or is that a moral irrelevance?

And what if the international bondholder’s would all just turn up to be close affiliates to the current government? I mean “A PDVSA bond maturing in 2017, on which a $2.3bn payment is due on November 2, is trading at about 80 per cent of par — hardly a sign of panic” could be indicative of it. Would it then just be another case of corruption? Insider trading?

The world needs a Sovereign Debt Restructuring Mechanism (SDRM) but, for that to be of any service or at least not a disservice to We the People, it needs to start with clearly defining what should be considered as odious credits or odious borrowings. As a minimum all bonds should not be bearer bonds, as we citizens should always have the right to clearly be able to identify who are financing our governments, and in what conditions, so that if we are not able to hold our governments accountable, like in Venezuela, we are at least able to hold its (our) creditors accountable.

@PerKurowski ©

Martin Wolf, bank regulators ordered trust to crumble, so the west is already falling. Your silence is complicit

Sir, Martin Wolf lashes out at the possibilities of Donald Trump being elected president of US and on its consequences. I agree though I would not go to such extreme as arguing that “It would, for example, end efforts to manage the threat of climate change, possibly forever”. "If trust crumbles, the west is lost" September 28. 

But I also believe that the possibilities of the US, among democrats, republicans and We the People, to put a stop to most potential Trump lunacy is very big… almost a certainty.

But in my firm opinion the west is already crumbling thanks to those statist and risk adverse regulations that were introduced in 1988 with Basel I and that really exploded in 2004 with Basel II.

The credit risk weighted capital requirements with their risk weights of 0% for the sovereign, 20% for the AAArisktocracy, 35% for residential houses, 100% for We the (unrated) People and 150% for the below BB-rated outcasts, has completely distorted the allocation of bank credit to the real economy. The west was not built with such regulations but the west is certainly doomed to gloom with it.

Unfortunately, the world of top experts, renowned academicians and famed journalists, which includes Martin Wolf, have not been able to even bring up Basel’s distortion of bank credit into discussions. And the testers of bank stress keep on looking only at what is on the balance sheets and without caring a iota about what does not, like sufficient loans to SMEs and entrepreneurs.

If the west had to choose between Donald Trump and the Basel Committee, I know who I would vote for, again of course counting on a lot of support to reign in his worst excesses.

PS. Here are two questions that if a moderator of the US candidates for president debate I would ask:

Donald Trump, how much damage would the republicans and democrats allow Hillary Clinton to do if she is elected president?

Hillary Clinton, how much damage would the democrats and republicans allow Donald Trump to do if he is elected president?

@PerKurowski ©

Is now OECD blaming central bankers? Has it no shame? OECD is just as guilty.

Sir, William White, the chair of the OECD’s economic and development review committee tells us “Only government action can resolve a global solvency crisis” September 26.

I don’t get it. Is now the OECD blaming central bankers? What? Since 1988, with the Basel Accord, Basel I, approved enthusiastically by the OECD, the sovereigns of the OECD, in other words OECD governments, for the purpose of the capital requirements for banks, have been risk weighted at 0%, while We the People have been assigned a risk weight of 0%. What good has that done us?

White writes: “The monetary stimulus provided repeatedly over the past eight years has failed to produce the expected expansion of aggregate demand.” Is expansion of aggregate demand by monetary stimulus the only thing that was expected to solve stagnation? If so, our grandchildren are screwed. What about the workings of the real economy, like the SMEs and the entrepreneurs, those that OECD and bank regulators don’t want to have access to bank credit, only on account of these being risky borrowers?

@PerKurowski ©

The absurdity of Mario Draghi’s leadership is even worse when considering his close connection to bank regulations

Sir, Wolfgang Kuhn writes: “Mario Draghi, the president of the European Central Bank, relies on bank lending to stimulate the economy but criticises “an excess of eurozone lenders” (“Draghi blames ‘over-banking’ for low profits”, September 23). He worries about systemic risks of big financial institutions but he wants to get rid of small ones.” “Draghi’s leadership is a cause for concern” September 26.

Indeed, but let us try to understand Mario Draghi. Besides being the president of ECB he was once the chair of the Financial Stability Board and is the current chair of the Group of Governors and Heads of Supervision of the Basel Committee for Banking Supervision.

So, with his bank regulator hat on, Draghi might think that if the whole banking system was reduced to some few Too Big To Fail banks, then his troubles would be over.

Jest aside, Draghi’s close link to bank regulations makes it even so much worse. Draghi should know that the risk weighted capital requirements for banks stops bank credit from being allocated efficiently to the real economy, and that is probably the greatest absurdity with him. He injects liquidity, and then he stops it from reaching “the risky”, like SMEs and entrepreneurs.

I don’t know why, but in the case of Mario Draghi (and other regulators) I often get the feeling that some Jerzy Kosinski - Being There - Chauncey Gardener - Chance the gardener characters, have somehow managed to infiltrate the higher spheres of finance.  They are walking systemic risks!

Anything that might weaken the future real economy, destroys pensions which depend more on tomorrows than on todays

Sir, Tim Harford argues “it’s far from clear that the Bank really is destroying pensions. It is true that low interest rates make future obligations loom larger in today’s company accounts. This creates a problem for any pension scheme. But, on the other side of the equation, low interest rates have boosted the value of shares, bonds and property and thus the value of most pension schemes” “Carrots with bite” September 24.

What? Does the Undercover Economist believe that lifting short-term the values of shares, bonds and property has much to do with the long-term value of those assets when they need to be liquidated so as to fulfill retirement expectations? 

Harford writes “Pensions campaigner Ros Altmann recently launched an eye-catching attack on the Bank of England for paying generous pensions to its own staff while undermining everyone else’s retirement plan.” Of course central bankers, and bank regulators, should be held much more accountable for what they do to the economy… and not only by pensioners but also by those needing the jobs that Andy Haldane comments with: “I sympathise with savers but jobs must come first.”

The risk weighted capital requirements, which give banks clear incentives to only refinance the safer past and stay away from financing the riskier future, will hurt both the pensioners when trying to sell assets into a sinking economy, and the young who need jobs in order to at least conserve an ilusion of a decent retirement. 

Harford writes: “The basic principle for any incentive scheme is this: can you measure everything that matters? If you can’t, then high-powered financial incentives will simply produce short-sightedness, narrow-mindedness or outright fraud.”

Harford should really read a recent working paper published by the ECB, “The limits of model-based regulation”. That describes what should go wrong, if you allow banks, by mean of their own complex risk models, to set their own incentives. Perhaps with that Harford who like so many other with close to willful blindness trusted Basel’s risk based regulations, will see that some other than little me, are now reluctantly beginning to have some serious doubts.

@PerKurowski ©

Could Gillian Tett possibly find something positive in removing the incentives for banks to lend to SMEs and entrepreneurs?

Sir, Gillian Tett, discussing whether to have or not to have bins, as these could be used by terrorists writes: “Losing them shows …– that trust and confidence can unravel in the face of terrorism and fear. Indeed, the symbolism is so stark that I am tempted to argue that it is a mistake to “give in” by removing those bins; in statistical terms, the risk of actually dying in a terrorist bomb attack is exceptionally small.” “Don’t throw our bins away” September 24. 

Well, the risk of having a bank crisis resulting from excessive exposures to what was ex ante perceived as risky, is exceptionally small, I would say none. Yet bank regulators clearly gave in to some imagined fear and decided the capital requirements for banks should be much higher for what is perceived as risky, than for what is much more dangerous, namely what is perceived as safe. 

And contrary to how Ms. Tett might find something positive in the removal of bins, and which with one could agree, I cannot understand what positive one could possibly find in removing the incentives for banks giving loans to “risky” SMEs and entrepreneurs; those who in fact most need bank credit; those who we in fact most want to have bank credit, so that our economies do not stall and fall. 

Perhaps Ms. Tett would be interested in reading a recent working paper published by the ECB, “The limits of model-based regulation”. It shows that some of those who like Ms. Tett with close to willful blindness trusted Basel’s risk based regulations, are now reluctantly beginning to have some serious doubts. 

@PerKurowski ©

Not only criminals and tax-evaders, but also ordinary people can be against restrictions on cash.

Sir, referring to how the existence of cash creates difficulties for central banks imposing negative interests. you mention “economist Kenneth Rogoff, one of the… restrictions on the use of cash noted proponents, is still receiving death threats for raising the idea. “The growing challenge to central banks’ credibility” September 24.

Frankly, that phrases it as only assassins and bad people would be for blocking the idea of restricting cash. I am sure that non-violent, non-criminal, not-tax evading ordinary people can also find the restriction of cash very problematic.

Just as an example, if governments mistreat cash, with inflation, they mistreat all holders of it equally, but if there was no cash and all monetary assets and their movements were identifiable, they could be very selective in who they want to mistreat or not.

Does this mean in any way or form that I condone the bad uses of cash? Of course not, that would be worse than silly.

PS. Central banks that only want banks to harvest what’s “safe” and not sow what’s “risky”, do not deserve any credibility. 

@PerKurowski ©

Central banks that only want banks to harvest what’s “safe” and not sow what’s “risky”, do not deserve any credibility

Sir, you write “central banks have resorted to ever more ingenious methods to convince a sceptical public that they still have the ability to create inflation”, “The growing challenge to central banks’ credibility” September 24.

Excepting those loving the current inflation in the values of assets, what sceptical public do you identify as wanting the core goal of central banks to be achieving higher inflation?

And as for their tools to obtain that “core goal” you mention the failures of QEs and low interest rates, and seemingly want them to dig deeper into negative interest rate territory.

No Sir! Any central banker that does not speak out against the risk weighted capital requirements for banks, that which have banks only refinancing the safer past and not financing the riskier future, do not deserve any credibility. Moreover they should be publicly shamed.

PS. Not only criminals and tax-evaders, but also ordinary people can beagainst restrictions on cash

@PerKurowski ©

Truth is that all in the Fed behave less like doves, and much more like statist hawks

Sir, Sam Fleming writes: Federal Reserve once again held short-term interest rates unchanged… a victory for doves… Even if they concede a quarter-point increase by the end of the year, it will leave the Fed on track for the shallowest rate-lifting cycle in modern times”. “Doves ascendant in Yellen’s Federal Reserve” September 23.

The effects of keeping those interest rates down, when combined with the QEs, and when combined with the regulatory subsidies implicit in the 0% risk weighting of the sovereign, goes primarily and in large scale to the government. In that respect I am not sure we should talk about Fed doves, they all qualify more as statist hawks.

@PerKurowski ©

​

ECB and other statist still believe the way to a better future is lowering the debt costs of governments.

Sir, Claire Jones writes: “Altering the capital key rule would relieve banks [ECB] of the need to buy as many German Bunds as at present and allow them to purchase more bonds from heavily indebted states, such as Italy. “ECB fears legal action will limit scope to extend QE” September 23.

Even after monstrous amount of QEs have not led to sustainable growth worthy to write home about, central bankers, bank regulators, interested government bureaucrats and many of their statist colleagues, still believe that keeping the cost of debts of their government artificially low, is a way out to the current problems.

I don’t! I believe much more that the future potential for jobs, and for decent retirements, is in the hands of allowing SMEs and entrepreneurs an equal access to funds.

And that begins by throwing the risk-weighted capital requirements for banks out on the closest garbage landfill, where it belongs.

@PerKurowski ©

Portugal might need everything to be perceived as risky, so as to stop the regulatory distortions of bank credit

Sir, Peter Wise mentions a “crucial ruling by Canadian rating agency DBRS next month on Portugal’s only investment-grade credit rating.” “IMF fears Portugal recovery is running out of steam” September 23. 

Again, with bank regulations that directly discriminate against the access to bank credit of SMEs and entrepreneurs, only on account of them being perceived as risky, as if those perceptions were not already considered by the banks, there is no way any other type of stimulus is going to be sustainable, and the economy not run out of steam.

If Portugal cannot free itself from these regulations, perhaps the best think that could happen to it is for everything to be downgraded and seen as equally risky.

That would at least allow for some more efficient allocation of bank credit to the real economy. That could give Portugal a chance to work itself out of that hole in which, as I see it, the Basel Committee on Banking supervision, with its senseless risk weighted capital requirements for banks, has helped to dig. 

How sad IMF refuses to understand how current bank regulations distort.

@PerKurowski ©

As banks “pressure employees to hawk products”, regulators pressure banks to odiously discriminate against the risky

Sir, John Gapper writes about “the intense pressure Wells Fargo placed on employees to hawk products” “Wells Fargo reaches the end of its journey” September 22.

But, by means of the risk weighted capital requirements for banks, regulators have placed much pressure on banks to lend to what was perceived, decreed or concocted as safe; because that’s were they could leverage the most their equity; because that’s where they could earn the highest expected risk adjusted returns of equity; and so banks end up with excessive exposures to residential home financing, AAA rated securities, loans to sovereigns like Greece and other such fancy safe stuff.

That created also a de facto immoral regulatory discrimination against the access to bank credit of those who ex ante are perceived as “risky”, like SMEs and entrepreneurs. I place quotation marks around risky because in fact, by being perceived as that, they are never as dangerous to the bank system than what is perceived as “safe”.

Incentives are temptations, aren’t they? 

@PerKurowski

The German banks overextension to the shipping industry represents a great opportunity for investigative journalism.

Sir, James Shotter writes: “Before the financial crisis, lending to the shipping industry was big business for many German banks. [Now] however, those maritime exposures have assumed a nightmarish quality.” “Perfect storm looms over shipping lenders” September 21.

What a wonderful opportunity to do some real journalistic investigation. Why does not Shotter dig in and research what bank capital requirements the financing of the shipping industry generated for German banks? And then try to figure out whether German banks would have been so dangerously overexposed to it, had they been required to hold the same capital as when lending to German SMEs and entrepreneurs.

@PerKurowski

US, when will senators, like Elizabeth Warren, grill bank regulators with the same gusto they grill ban​k​sters?

Sir, I refer to Barney Jopson and Alistair Grays report on how John Stumpf was grilled in the Congress Wells Fargo clear misbehavior “Wells chief savaged in Congress over fake accounts” September 21.

Democratic senator Elizabeth Warren told Mr Stumpf: “Your definition of accountable is to push the blame to your low-level employees who don’t have the money for a fancy PR firm to defend themselves. It’s gutless leadership. The only way that Wall Street will change is if executives face jail time when they preside over massive frauds.”

Is senator Warren wrong? Absolutely not, but the grilling, if it does not also include a serious grilling of the bank regulators, is just another pushing all the blame on banks, in order to score cheap populist victories attacking “banksters”.

Here follows just few of the questions the US Senate's Banking Commission should pose regulators.

With your risk weighted capital requirements you allow banks to leverage more their equity, and the support we the society give them, with what is perceived as safe than with what is perceived as risky.

Do you not understand that favoring in this way The Sovereign, The Safe, The Past, The Rich, The Houses and The AAArisktocracy, impedes the fair access to bank credit of We the People, The Risky, The Future, The Poor, The Jobs and The Unrated? Who gave you the right to distort the allocation of bank credit to the real economy this way? Don't you understand with that you have de facto decreed inequality?

In all your regulations where have you defined the purpose of our banks? Does not John A Shedd saying: “A ship in harbor is safe, but that is not what ships are for” also apply to banks? Or is it really that you felt you did not need to do that in order to regulate banks?

Finally, for this first round of questions: Where did you get that funny idea behind all this that what is ex ante perceived as risky, is riskier to the banking system than what is perceived as safe, and that is therefore much likely to cause dangerous excessive bank exposures? Have you never heard of Voltaire’s “May God defend me from my friends [AAA rated]: I can defend myself from my enemies [BB- rated]”?

Don’t you see how these regulations helped to cause the crisis? Don’t you see how making it harder than usual for SMEs and entrepreneurs to access bank credit dooms us to stagnation?

By the way, before you go, where do you think we would we be if the credit rating agencies had, so luckily, not fouled up so fast?

@PerKurowski ©

Senator Elizabeth Warren, what about the staggering bad bank regulations that came out of the Basel Committee?

Sir, Patrick Jenkins writes: “Today, Mr Stumpf will face an inquisition at the Senate banking committee. It promises to be a hostile experience — no-nonsense committee member Elizabeth Warren is not known for her love of the banking sector and has already talked of Wells’ “staggering fraud”. “Wells Fargo chief ’s high noon is Senate committee grilling” September 20.

I’ve got no problem with any “grilling” of bankers, give it to them! But, Senator Warren, in all fairness, do not turn it all into another simpleton Bank-Bashing fair, We the People need it to be much more. If anything, look at how the bank regulators set up all the incentives for bankers to do wrong.

Why on earth should we expect bankers to be saints and resist the temptations? Aren’t they supposed to maximize their risk adjusted returns on equity?

What am I talking about? THIS

http://subprimeregulations.blogspot.com/2016/09/if-ever-allowed-following-would-be-my.html

PS. And Senator Warren, why would you agree with those who decreed inequality?

http://subprimeregulations.blogspot.com/2016/03/decreed-inequality.htm

@PerKurowski ©

Mario Draghi is one of those who decided to put a stop on the egalitarian forces of bank credit, decreeing inequality.

Sir, Motoko Aizawa and Daniel Bradlow write: “Quantitative easing, by raising asset prices, has disproportionately benefited the wealthy, thereby contributing to rising inequality.” And they are of course right questioning why Mario Draghi “does not acknowledge the ECB’s own responsibility for the growing concern about redistribution and inequality in Europe and around the world.” “Draghi must accept ECB contributes to inequality” September 19.

But, when they write “Moreover these policies seem indifferent to the need for a more inclusive financial system that, for example, increases the availability of credit to small businesses and encourages banks to provide financial services more responsive to the needs of the poor and young people.”, they do not focus on what’s really causing this, namely the risk weighted capital requirements for banks.

That specific piece of regulations favors the access to bank credit of the safe, the past, the developed, the old, and the rich; and thereby blocks the opportunities of the risky, the future, the developing, the young and the poor.

John Kenneth Galbraith in his book “Money: “whence it came, where it went” (1975) wrote “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is…”

The Basel Committee of which Mario Draghi is the current chair of the Group of Governors and Heads of Supervision; and the Financial Stability Board of which he was the former Chair, decided to put a stop on such egalitarianism… and basically decreed inequality.

@PerKurowski ©

Global and local inequality is much driven by dumb bank regulations. World Bank and IMF should do something about i

Sir, Branco Milanovic, with respect to “global inequality” writes: “While for national statistics and inequality measures, there is at least a national government that citizens can blame for high inequality, there is no comparable body globally.” “Putting a number on global inequality is long overdue" September 19

Oh no! For quite a lot of that inequality, I totally blame the Basel Committee on Banking Supervision. With its risk-weighted capital requirements for banks, which favor the access to bank credit of the “Safe”, the developed, the rich, the past, it is basically decreeing inequality.

The interesting aspect with that global inequality driver is that it also causes inequality on a local national level. Just try to figure out how many millions of SMEs and entrepreneurs, all around the world, have been denied access to bank credit because of this regulation.

And yes both the World Bank and the International Monetary Fund have a role to play correcting this.

The World Bank, as the world’s premier development bank, knowing that risk taking is the oxygen of any development, should send bank regulators clear signals to the effect that nothing is as dangerous as excessive risk aversion.

And the IMF, in charge of worldwide financial stability, should also tell regulators to stop being silly, since no major bank crisis has ever resulted from excessive exposures to something ex ante perceived risky. 

PS. And FT should stop covering up for dangerous and failed bank regulators.

@PerKurowski ©

Lucy Kellaway, how should guilty bank regulators apologize and be held accountable?

Sir, I refer to Lucy Kellaway’s “Wells Fargo’s wagonload of insincere regrets” September 17, only in order to ask her a question.

Here is a link to my unasked for testimony on the causes of the bank crisis 2008

http://subprimeregulations.blogspot.com/2016/09/if-ever-allowed-following-would-be-my.html

If I am correct, how would Lucy Kellaway suggest the guilty bank regulators should apologize… and how should they be held accountable?

@PerKurowski ©

This would be my brief testimony about what caused the 2008 bank crisis… if ever allowed

Sir, John Authers writes: “This week, Senator Elizabeth Warren, said the next president should reopen investigations into senior bankers who avoided prosecution, and that the FBI should release its notes on its investigations. The failure to punish any senior bankers over the scandal angers the populist left and right, the world over.”, “We are still groping for truth about the financialcrisis” September 17.

The following, if I am ever allowed to give it, as so many would not like to hear it, would be my brief testimony on what caused the 2008 bank crisis

Sir, as I have learned to understand it, the 2008 crisis resulted from a combination of 3 factors.

The first were some very minimal capital requirements for some assets that had been approved starting in 1988 for sovereigns and the financing of residential housing; and made extensive in Basel II of 2004 to private sectors assets with good credit ratings.

These allowed banks then to earn much higher expected risk adjusted returns on equity on some assets than on other, which introduced a serious distortion. After Basel II the allowed bank equity leverages were almost limitless when lending to “sound” (or friendly) sovereigns; 36 times to 1 when financing residential housing; and over 60 to 1 with private sector assets rated AAA to AA. Just the signature, on some type of guarantee by an AAA rated, like AIG, also allowed an operation to become leveraged over 60 times to 1.

The second was Basel II’ extensive conditioning of the capital requirements for banks to the decisions of some very few (3) human fallible credit rating agencies. As I so many times warned about (in a letter published in FT January 2003 and even clearer in a written statement delivered at the World Bank), this introduced a very serious systemic risk.

The third factor is a malignant element present in the otherwise beneficial process of securitization. The profits of that process are a function of how much implied and perceived risk-reduction takes place. To securitize something safe to something safer does not yield great returns for the securitization process. Neither does to securitize something risky into something less risky.

What produces BIG profits is to securitize something really risky, and sell it off as something really safe. Like awarding really lousy subprime mortgages and packaging them in securities that could achieve an AAA rating. A 11%, 30 years, $300.000 mortgage, packaged into a security rated AAA and sold at a 6 percent yield, can be sold for $510.000, and provide those involved in the process an instantaneous profit of $210.000 

With those facts it should be easy to understand the explosiveness of mixing the temptations of limitless , 36, and more than 60 to 1 allowed bank equity leverages; with subjecting it too much to the criteria of few; with the profit margins when securitizing something risky into something “safe”. Here follows some indicative consequences:

As far as I have been able to gather, over a period of about 2 years, over a trillion dollars of the much larger production of subprime mortgages dressed up in AAA-AA ratings, ended up only in Europe. Add to that all the American investment banks’ holdings of this shady product.

To that we should also add Europe’s own problems with mortgages, like those in Spain derived in much by an excessive use of “teaser interest rates”, low the first years and then shooting up with vengeance.

And sovereigns like Greece, would never have been able to take on so much debt if banks (especially those in the Eurozone) would not have been able to leverage their equity so much with these loans.

Without those consequences there would have been no 2008 crisis, and that is an absolute fact.

The problem though with this explanation is that many, especially bank regulators, especially bank bashers, especially low equity loving bankers, do not like this explanation, so it is not even discussed.

The real question though is: Who is the guiltiest party, those who fell for the temptations, or those who allowed the creation of the temptations?

I mean how far can you go blaming the children from eating some of that deliciously looking chocolate cake you left on the table, at their reach?

Sir, John Authers, tell me if you believe I at least have a point, should that not merit a discussion?

@PerKurowski ©

Free market capitalism with regulatory controls on the free flow of bank credit, is an oxymoron

Sir, I am not discussing here Margrethe Vestager’s, the European Commission’s competition chief decision to order Apple to pay €13bn in back taxes to the Irish government. But, titling as Philip Stephens does his September 16 article, “How to save capitalism from capitalists” seems to me topsy-turvy.

What now most hinders free-market capitalism from delivering its full potential, is not capitalists, but inept and statist bank regulators.

Currently, for the purposes of the risk weighted capital requirements for banks, “The Risky”, like SMEs and entrepreneurs, those who cannot even afford a credit rating, are given a risk weight of 100%, while the government bureaucrats who are going to spend the tax revenues, or the public indebtedness, are risk weighted at 0%.

That translates into that government borrowings are subsidized, a fiscal revenue, with the subsidies, the taxes, paid by those “risky” that as a result have less access to bank credit.

So the real question should be: how to save free-market capitalism from state capitalists.

As is we really need a Robin Hood to come and rescue us from Sheriffs of Nottingham disguised as expert bank regulators.

But it is even worse, because those yet unpaid €13bn of Apple are not allowed to flow freely as bank credit even within the private sector; and that is because “The Safe”, the AAArisktocracy, have also been given a much lower risk weight, one of only 20%.

Sir, and if only those who rightly pressure taxpayers to correctly pay up, would also try to pressure with the same vehemence, the tax revenue spenders to correctly spend.

@PerKurowski ©

Nowadays they are much more sophisticated

PS.Basel Committee’s risk weighted bank capital requirements with decreed risk weights of 0% governments - 100% citizens have, since 1988, empowered a Bureaucracy Autocracy.

What’s perceived safe could be much more dangerous than what’s perceived risky. Why is that so hard to understand?

Sir, Gillian Tett, responding to “Why on earth would anyone buy a bond that yields a negative interest rate?” includes in the answer: “desperation” (they cannot think of anywhere else to park their funds) or “regulation” (they have to buy bonds to comply with financial supervision rules or investment mandates)” “The alchemists who turn negative yields into profit” September 16.

And then Ms. Tett explains interestingly how “some investors have found ways to make those negative yields pay” with “the rather esoteric corner of finance of dollar-yen cross currency swaps”.

But, if “government intervention to reinvigorate stagnant economies has left markets so peculiarly distorted” is the search for profit opportunities derived from distortions more important than eliminating the distortions?

I ask, because in all these years Ms. Tett has been unwilling to touch, even with a ten-foot pole, one of the most fundamental sources of distortion, namely the risk weighted capital requirements for banks.

That piece of regulation, by focusing on the ex-ante perceived risk of bank assets, and not on the ex-post risk for the banking system conditioned to how banks manage those ex-ante perceived risks, is loony and dangerous. As an example it allowed regulators to come up with a risk weight of only 20% for AAA to AA rated assets, while placing one of 150% on the so much less dangerous assets like the below BB- rated.

Sir, am I wrong to think an anthropologist should be able understand this?

@PerKurowski ©

Governments best take big decisions, when there’s no conflict of interest, no stupid groupthink, and contestability.

Sir, I come from an country, Venezuela, where privatizations of public owned utilities were based not on who would provide us citizens the best services, but on who would provide the state with the highest upfront payment… an anticipated tax revenue for the government, to be paid later by us citizens by means of higher than needed tariffs, for decades to come. And, to top it up, that was accused of being odious neo-liberalism product of the Washington Consensus. 

That’s why when I read Martin Wolf’s “Big energy decisions are best taken by government, not the market” of September 16… I immediately reacted… “Hold it there, take it very easy!”

If government is going to take big decisions, as it should, we must make sure all its possible conflicts of interest are removed, and that the decision process is transparent and guarantees contestability, and not just the result of a small mutual admiration club of technocrats/bureaucrats.

For instance, allowing bank regulators to impose their statism of a 0% risk weight for the Sovereign and a 100% risk weight for “We the People”, was wrong.

And allowing bank regulators to impose risk weighted capital requirements for banks based on the ex ante perceived risks of bank assets, and not on the ex post risks conditioned on the ex ante perceived risks, was utterly stupid. What’s the chance of something really bad happening from something perceived as “safe”, and what is it for something “risky”?

Wolf lectures us: “Rational risk-taking by individual financial businesses will create substantial threats for others. This, too, is a spillover, or “externality”. Financial regulation has to internalise such externalities, thereby reducing the likelihood of crises and making them more manageable when they arrive. One way to do so is to raise capital requirements far above what profit-seekers would wish”

I argue that much more important than that, is to get rid of the credit-risk weighting of the capital requirements that only distorts the allocation of bank credit to the real economy while serving no bank safeness purpose, much the contrary. Wolf, in spite of hundreds of letters I have sent him over a decade on this issue, has yet to understand that.

And Wolf ends “The government must have the courage to make… difficult decisions and the wisdom to make them well.” Yeah, yeah, yeah, but what if the decision makers are dumb and we are not allowed to correct them… because so many want to suck up to them nevertheless (like in Davos)… or because some are interested in exploiting that dumbness? 

@PerKurowski ©

For governments to take advantage of current low rates in order to build infrastructure, is not a sure great thing.

Sir, Trevor Greetham argues that the government, taking advantage of current conditions, should take on debt and invest in infrastructure, all in order to stimulate nominal growth through government spending while suppressing interest rates; meaning that it should on purpose pursue a policy of transferring wealth from savers to borrowers.” “Hammond should not let the low gilt yields go to waste”. September 15.

Sir, I am not sure that is a constructive way of thinking. Greetham mentions that a big reason for the low interest rates on government bonds is “pension fund buying”. I assume he would not dare to complain if, when he retires, he does not get the pension he expected.

But worse, another reason for the low interest rates is the risk weighted capital requirements for banks; which diverts credit from 100% risk weighted SMEs and entrepreneurs, to the 0% risk weighted government. That sounds like a very doubtful way of how to build future.

And that’s even ignoring the possibilities of much infrastructure investments ending up in bridges to nowhere.

@PerKurowski ©

I don’t understand how the British people can accept so quietly the Basel Committee’s risk weights.

Sir, Elaine Moore writes: “British debt — one of the oldest securities in the world whose roots can be traced back to King William III’s desire to fund a war in France — should be relatively straightforward. Domestic and international investors regard the UK as a safe bet” “FT Big Read: UK Gilt complexities” September 15.

Moore ignores here the effect of current bank regulations but I must say, to me, as an outsider, it is truly hard to understand how, in these days, the British people allow the Basel Committee to assign them a risk weight of 100% while giving the AAArisktocracy one of only 20% and the Sovereign a 0%.

Where would Britain have been today had these risk weights, that clearly discriminate against the access to bank credit of SMEs and entrepreneurs, been in place since King William III’s days?

Don’t you think that your governments have it easy enough to sell gilt without having to give it this regulatory subsidy?

I wonder if anyone at BoE has given the slightest thought to where interest rates on new gilt sold would be, without a little help from the Basel Committee?

Sir, doesn’t anyone in FT know that the “little help” is paid by the lesser or more expensive access to bank credit of some other? 

@PerKurowski ©

Mario Draghi, you should be ashamed, as a bank regulator, you helped to leave behind, those left behind

Sir, Claire Jones and Alex Barker write that Mario Draghi, the president of the European Central Bank, Donald Tusk, the president of the European Council, and Christine Lagarde, the head of the International Monetary Fund…issued separate pleas yesterday to address the plight of those “left behind” by globalization”, “Draghi makes appeal for those ‘left behind’” September 14.

The fact is though that Mario Draghi, the former chair of the Financial Stability Board, and the current Chair of Governors and Heads of Supervision of the Basel Committee on Banking Supervision, is fully supporting the pillar of current bank regulations, namely the risk weighted capital requirements for banks.

That regulation has given a risk weight of 0% to the Sovereign, 20% to the AAArisktocracy, and 100% to We the People, like the SMEs and entrepreneurs.

John Kenneth Galbraith in his “Money: Whence it came where it went”, 1975, wrote: “The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is”.

And so, with their discrimination against “The Risky”, regulators, like Mario Draghi, decreed inequality. And so they have no right to try to bullshit us now with some deep-felt concerns with those left behind.

And to top it up, with his QEs, Draghi has mostly helped those who already had assets.

@PerKurowski ©

Martin Wolf, motorcycles are much riskier, and that’s precisely why more people die in car accidents

Sir, Martin Wolf writes: “The determinants of the secular decline in the real natural (or neutral) rate of interest are forces affecting the supply and demand for funds. These include ageing, slowing productivity growth, falling prices of investment goods, reductions in public investment, rising inequality, the “global savings glut” and shifting preferences for less risky assets” “Monetary policy in a low rate world”, September 14.

Not a word about the risk weighted capital requirements for banks. These have created regulatory incentives for banks to avoid, much more than usual, any riskier assets, like loans to SMEs and entrepreneurs, and to concentrate, much more that usual, on assets that are perceived, decreed or concocted as safe, like loans to the Sovereign and to the AAArisktocracy. And that has to slow the growth of productivity and cause the real economy to stall and fall.

That motorcycling is perceived as much more riskier, and that precisely because of that, more people die in car accidents, is a reality that neither our current bank regulators nor Martin Wolf can seem to understand, confused as they are by what is ex ante and what is ex post risks.

Like Lawrence Summers Wolf opines “Today’s remarkably low real interest rates mean that a big push on public investment has never been more opportune.”

Yeah, yeah trust more in government bureaucrats than in the “risky” private sector, and leave the bill to future generations.

@PerKurowski ©

When does groupthink really become more of a dangerous group-no-think?

Sir, Andrew Hill, discussing the works of Jennifer Chatman from UC Berkeley’s Haas School of Business writes: “Cohesion and co-operation may look like virtues, but they could be symptoms of groupthink. The greater the collective will of the team — and the higher the stakes — the less likely people are to dissent, because, in Prof Chatman’s words, ‘speaking up about risks is like saying you have no confidence in the group’.” “When the stakes are high, dissent is a sign of success”, September 12

So if “dissent and friction are unlikely signals of success” Prof Chatman says: “Maybe we need to live with a little more discomfort and difference to get these valuable outcomes.”

And again I must ask myself; might that be the reason for that no one in the bank regulation community spoke up against that strange theorem that held that what was perceived as risky was riskier to the banking system than what was ex ante perceived as safe? That theorem is in fact so loony that we perhaps should not even speak about groupthink, but more in terms of group-no-think.

And truly dangerous that was, since from that theorem they deducted their risk-weighted capital requirements; which then completely distorted the allocation of bank credit to the real economy.

So what “little more discomfort” should we apply for instance to the Basel Committee? Could a town-hall meeting where doubters could ask their questions suffice? I am not sure, I have spent more than a decade asking the regulators this, and they just don’t answer; worse nobody finds anything strange with their silence.

Or is it that what I confront is not a group but a massive gathering of confused minds; that among other includes you Sir and perhaps all FT journalists; I mean something like that which was the case when the earth was believed flat?

@PerKurowski ©

And we must also stop regulators, like those in the Basel Committee, from being so damn creative

Sir, I refer to Lucy Kellaway’s “The plague of compulsory creativity may be dying out” September 12.

She is absolutely right in what she there argues, but she could have added power to her arguments by identifying when empowering creativity, can lead to some truly dangerous creativity, and cause huge disasters.

Think for instance of the bank regulators in the Basel Committee. Based on the very creative theorem that what is ex ante perceived as risky, is riskier for the bank systems than what is perceived as safe, they created the risk weighted capital requirements for banks; and with that they seriously distorted the allocation of credit to the real economy,

And now the safe havens are becoming dangerously overpopulated, while all the risky bays, where SMEs and entrepreneurs reside, are equally dangerous being underexplored.

@PerKurowski ©

Lawrence Summers wants to get the quality infrastructure jobs now, and leave the bill to future generations

Sir, Lawrence Summers writes “Infrastructure investment can create quality jobs [and] expand the economy’s capacity in the medium term and mitigate the huge maintenance burden we would otherwise pass on to the next generation” “Building the case for greater infrastructure investment” September 12. 

And since that is based on taking on more public debt that shamefully sounds like: “Dear lets go out tonight to enjoy that great restaurant. We can leave the bill to our grandchildren, as the interest rates they have to pay are so low.”

Summers backs up his proposal with some calculations that start with “The McKinsey Global Institute has estimated a 20 per cent rate of return on such investments.”

Well Professor Summers, and McKinsey, and so many other, because they do not know, or because they are pushing a statist agenda, completely ignore the fact that currently the sovereign, meaning the government represented by government bureaucrats, for the purpose of setting the capital requirements for banks, is risk weighted at 0%; while We the People, represented by SMEs and entrepreneurs have to carry a risk weight of 100%.

That subsidizes the borrowing costs of the government, by the taxing the possibilities of accessing bank credit of those who we need most to have access to bank credit.

Of course much infrastructure investment needs to be done, but, in order for there being an economy that could use such infrastructure, much more important is it to take down that odious regulatory wall.

Sir, again, banks are no longer financing our grandchildren’s future, they are only refinancing mine, yours, Professor Summers’s and all McKinsey’s safer past.

What a disgraceful way of giving the finger to that intergenerational social contract Edmund Burke wrote about.

@PerKurowski ©

If an algorithm can be the boss, why don’t we use our own algorithms to be our own bosses?

Sir, I refer to Sarah O’Connor’s enlightening and interesting “When the boss is an algorithm” September 10.

I would not mind at all getting rid of my car, if I was sure there was a service out there that could respond reasonably well to my needs.

But my needs are in essence somewhat different than Uber drivers’ needs. I want a taxi when I need it, and they offer a taxi when their drivers feel like it.

So, in my neighborhood, and I care little about neighborhoods hundred of miles away, why could we not have a transportation cooperative, run by algorithms decided upon between users and drivers?

In fact, even if I got rid of my own car, I can easily imagine myself providing driving services using my neighbor’s car, with his remunerated permission of course, or using some collective neighborhood cars.

@PerKurowski ©

Tim Harford explains why a kakocracy, like that of the Basel Committee on Banking Supervision, is likely to endure

Sir, Tim Harford writes about “Kakonomics – the economics of rottenness. There are corners of the economy where poor work is the norm, not the exception.”, “The hazards of a world where mediocrity rules” September 10.

Harford argues “a true kakonomy is collusive, a tacit agreement to be mediocre at someone else’s expense …Once a kakocracy has been established, it is likely to endure: recruiters will be careful not to hire anyone who might not only rock the boat but also repair the leaks and fix the outboard motor.” 

If as a regulator, at the huge cost of distorting the allocation of credit to the real economy, you introduced risk weighted capital requirements for banks to make these safe, one could assume you would be able to answer the following question: When and where did the last bank crisis resulting from excessive exposures to something believed ex ante as risky occur?

So, if the Basel Committee the Financial Stability Board and all those other involved with bank regulations like the Fed, BoE, ECB, IMF, FDIC and similar can’t answer that question, would it be wrong of me Sir to suspect they all constitute a regulatory kakocracy?

Sir, if you yourself have steadfastly refused to listen and voice my arguments on this issue, perhaps so as not wanted to be seen as rocking the boat, would it also be wrong of me to believe you could belong to that same kakocracy?

Is a bank regulation kakocracy dangerous? You bet!

PS. Of course I do not base my suspicions on just one unanswered question.

PS. How resilient is the bank regulation kakocracy? If it is as willing to go to any extreme measures to defend its kakonomics, as the current Venezuela Chavez/Maduro government does, then we’re in serious trouble.

@PerKurowski ©

How can expectations be high when you discriminate against the future, on account of it being riskier than the past?

Sir, John Kay writes: “It is not because interest rates are too high that eurozone consumption is sluggish but rather because expectations are so low. Fiscal austerity and the aftermath of the global crisis have dimmed the employment prospects of a generation of young Europeans. Low interest rates have as intended pushed up the prices of long-dated bonds and houses” “The twisted logic of paying for the privilege of lending”, September 10.

Frankly, how can expectations not be low, when we have regulators that order banks to hold more capital against what’s perceived as risky, the future, a job to be created; than against what is perceived as safe, the past, a house that has already been built?

And Kay writes: “There are obvious requirements for investment in the eurozone — to provide power through cleaner energy plants, to improve roads and relieve overcrowding on trains, to build houses, to accommodate tens of thousands of recent refugees and above all to fund the new businesses that will promote innovation on the continent.”

Yes, but, if so, why do we not have capital requirements for banks based on those purposes?

Mr. Kay, I tell you, it is not “dysfunctional capital markets, rather than any excessively high interest rates, that are behind an investment shortfall across Europe”. It is totally dysfunctional bank regulations.

Mr. Kay also reminds us of the “aphorism that people will lend you money so long as you can prove you do not need it”. But Sir, that is what Mark Twain told us long ago: “The banker lend us the umbrella when the sun shines and wants it back when it looks like it could rain”; and which is precisely why the Basel Committees’ risk weighted capital requirements for banks don’t make sense.

Mr. John Kay, wake up!... and you too Sir.

@PerKurowski ©

Where have all safe assets gone? Short time passing. Gone to banks and central banks. When will regulators ever learn?

Sir, Elaine Moore, with respect to ECB’s QEs writes: “From the moment the European Central Bank first announced plans to revive the eurozone economy with a mass bond-buying programme, financial markets have expected trouble. First the focus was illiquidity and mispricing — now it is scarcity”, “Mechanics exposed as debt pool starts to run dry” September 9.

How could scarcity not be? Basel II’s low risk weighted capital requirements plus Basel III’s liquidity requirements, have substantially increased the demand of banks for low 0% risk weighted sovereign debt. That together with Central Banks purchases of “safe sovereign debt”, for their own QEs, just had to create scarcity.

Now we can hear widows, orphans and pension funds ask: Where have all safe assets gone? And the answer is to banks and Central banks everyone. Indeed when will they ever learn.

The saddest part though is that, as a result of all this odious regulatory distortion, the 100% risk weighted SMEs and entrepreneurs, those who most need and could do good with bank credit, they are left out hanging dry.

Sir, if we do not finance the riskier future and only keep to refinancing the “safer” past, we’re toast… even if there is no global warming.

@PerKurowski ©

FT, get off my cloud! Stop betting our future on technocrats and bureaucrats, instead of on SMEs and entrepreneurs

Sir you write: “Mr Draghi is justified in claiming that the ECB’s stimulus is working…[though] growth remains well below the level needed to drive sustained improvements in living standards.” So you basically egg Draghi on, just as you egg on governments to spend more of what they don’t have. “Draghi’s fight to uphold the ECB’s credibility”

Come on, the ECB has now after 18 months of aggressive bond buying, injected 1 trillion euros in cash into the economy… about 10% of the Eurozone’s GDP, and yet very little real sturdy sustainable economic growth has resulted. Don’t the technocrats ask themselves why?

Seemingly not; perhaps because that would require them to face that nightmarish possibility that the risk weighted capital requirements for banks, that regulation to which so many of them are closely associated to, is exactly as stupid as I have been telling them for way over a decade.

Mario Draghi is the chair of the Group of Governors and Heads of Supervision of the Basel Committee, and was the Chair of the Financial Stability Board. It is clear he would see his professional reputation severely tarnished by having to recognize publicly such simple facts of life that what is perceived as risky is, most often, much less dangerous than what is perceived as safe... and that therefore the Basel Committee’s bank regulation pillar, makes absolutely no sense.

The current credit risk weighting of the capital requirements for banks, hinders monetary and fiscal stimulus from reaching the risky SMEs and entrepreneurs, those who most could want and need the resources, those who most could do some real growth with those resources.

Sir, no matter how much runaway statists insist, it is just not true that the zero percent risk weighted sovereign bureaucrats know better how to deploy bank credit efficiently, than our 100% risk weighted private sector SMEs and entrepreneurs. Get off my cloud!

@PerKurowski ©

With respect to the Big Four, it is all déjà vu

Sir, I refer to Brooke Master’s “A clubby oligopoly that is overdue for reform” of August 20 and to your editorial “Accountancy’s Big Four need more competition” August 25.

“The Big Four accounting firms became big by marketing the value of their size. Now they want to have their cake and eat it too, asking to be sheltered from ruinous lawsuits. If accountability is to mean anything in accounting, we cannot afford to turn the concept of professional responsibility into a risk model of affordability.

Individual professionals and small firms lay their names on the line, day after day. If the Big Four cannot handle it, they had better let go. Then we might all be better off. At least the systemic risks will be smaller.”

Sir and that is a letter I wrote and that you published in May 2004, 12 years ago, before I became a pariah to FT.

And years earlier, in 1997, in an Op-Ed in Venezuela I had analyzed much of that issue though from a slightly more local angle. It is amazing to see how serious problems are identified, and then nothing is done to solve these, and they come back to haunt us over and over again.

PS. Brooke Master writes in her piece that a disgruntled PwC trainee described PwC as a “meat grinder” and moaned about how boring the job” Does that not sound like accounting could become ready for the use of robots?

@PerKurowski ©

Gillian Tett writes of Apple’s $200bn of cash, as if that money was all stashed away in Tim Cook’s mattress

Sir, Gillian Tett writes that Apple could “repatriate some of the $200bn of cash that it stores overseas”, “It is hard to lure companies’ cash back home” September 9.

And Tett indicates three ideas about what could be done with all that money.

“One, for example, is that tax breaks will only be given to companies that raise employment and investment. Another is that the Federal government should use tax revenues for infrastructure spending. A third, is that companies should store some of their repatriated corporate cash in government-issued infrastructure bonds.”

But that cash is not stashed away in Tim Cook’s mattress, it is invested somewhere somehow, and for the government to lay its hands on a part of it, some assets would need to be sold.

For instance what if all that cash is already invested in US Treasury yielding basically nothing? What if it is invested in shares?

And why should “tax breaks will only be given to companies that raise employment and investment”? It might not be the role of those companies to channel funds to those who could produce jobs. Apple, is not a bank!

Frankly, the strategic plan of our current economic thinkers is as lousy as can be.

It states: With high risk weights, limit the fair access to bank credit of SMEs and entrepreneurs, those who could create the jobs for the future; and with low risk weights increase the possibilities of government bureaucrats building bridges to nowhere.

Is that what you want Sir. If you do, I would then have to ask you: Do you have children and grandchildren? “No?” Ok, that explains it all.

@PerKurowski ©